CWA/ICWA Final :: Management Accounting—Decision Making : December 2003

*F-17(MDM)* *Revised Syllabus*
Time Allowed : 3 Hours		Full Marks : 100
Answer Question No. 1 which is compulsory and any five from the rest.
Marks

One of the four answers mentioned against each of the following cases is correct.
Indicate the correct answer with reason/working in each case (see note below)

(a)

The operating cost of a department over a five-year period were as follows:

Year	Cost index	Rs.	Hours worked
1 2 3 4 5	100 115 120 130 134	32,250 36,593 39,888 42,406 40,602	8,625 8,410 9,120 8,810 7,650

Estimated cost for the year 6 when the cost index will be 140 and hours worked will be 8,720 is

(A)

Rs. 32,605

(B)

Rs. 37,942

(C)

Rs. 42,844

(D)

Rs.45,416

(b)

A division of a company employs capital of Rs.2 million and its return on capital is 12%. It is considering a new project requiring fresh capital of Rs.5,00,000 and expected to yield profits of Rs.90,000 per annum. The company’s interest rate is 10%p.a . if the new project is implemented, the division’s residual income will be

(A)

Rs.30,000

(B)

Rs. 33,000

(C)

Rs.58,000

(D)

Rs.80,000

(c)

when the time taken by the first unit is 10 hours and the learning rate is 80%, the average time taken for each of 20 units produced would be

(A)

3.81 hours

(B)

3.35 hours

(C)

4.50 hours

(D)

4.00 hours

(d)

A Ltd. which manufactures small electronic circuits, has a capacity to produce 4lakh units. The market demand is sensitive to the sale price and it has been estimated that the company could sell 1lakh units when the price is Rs.50 per circuit. Thereafter the demand would double for each Rs.5 fall in the selling price. The company expects a minimum margin of 25%. Accordingly, the target cost of the company to sell at full capacity should be

(A)

Rs.20

(B)

Rs.25

(C)

Rs.30

(D)

Rs.32

(e)

The budgeted sales and cost of sales of Rahaman Brothers for the coming year are RS.15 crore and RS.10 crore respectively. The current level of inventory turnover is 5 tikmes. Considering that the inventory is fiananced at an average cost of 10%p.a.,, the expected cost saving for the budget by doubling the inventory turnover would be

(A)

Rs.20 lakh

(B)

Rs.10 lakh

(C)

Rs.15 lakh

(D)

Rs.7.5 lakh

Note: Answers not supported by reasons/workings shall earn no credit.

(a)

How does Throughput Accounting differ from Traditional Product Costing?

(b)

Gulnar Company of Hyderabad imports exotic perfume, named AXC, from France and markets same to shops in India. As the perfume marke is very comprtitive, the company’s directors believed that a change in marketing strategy would be beneficial. By reducing the selling price to the shops they wanted to achieve a greater sales volume. The company was able to negotiate a lower price with the French bottler for all of its purchases. This strategy did not have any effect in the company’s fixed costs. The change in marketing strategy took place on 1 April 2002.
Gulnar’s AXC sales results for 2001-2002 and 2002-2003 are summarized as under:

	2002-2002	2002-2003
1. Number of bottles of AXC bought and sold 2. Selling price per bottle 3. Cost price per bottle	10 lakh Rs. 50 Rs. 30	12 lakh Rs. 40 Rs. 27
Required:

(i)	Calculate the change in contribution caused byhte change in strategy?

(ii)	Analyse the figure calculated in (i) into the growth aspect, the price aspect, and the profitability (usage) aspect.

(iii)

Briefly explain and comment on how successful the change in strategy was and why?

(a)

What are the factors that influence the fixing an international transfer price?

(b)

Division A is a profit center. It produces three products: X, Y and Z. each product has an outside market. The relevant data are:

4+4

		X	Y	Z
(External market price /unit) Variable cost of production/unit Labour hours/unit Maximum outside sales	Rs. Rs. Hrs. Units	48 33 3 800	46 24 4 500	40 28 2 300

Labourers are interchangeable between the products. Up to 300 units, product y can be transferred to another Division B. Division B has got an outside quotation for the product y at Rs.45 per unit.
Required:
Determine the reasonable transfer price of y when the total labor time available in Division A is
(i) 4,100 hours,or (ii) 5,800 hours.

Please turn over

( 2 )

F-17(MDM)
Revised syllabus

Marks

(a)

As the manager of a manufacturing business, what kinds of information would you need to evaluate:

(i)	The quality of products
(ii)	The level of innovation?

4+4

(b)

Pharma Ltd. sells Ayurvedic medicinal products through direct orders booked by salesman when they call on potential buyers and also through mail orders which arise out of sales campaign by salesman. The company pays the salesman an incentive commission on the following basis:

5% of sales on orders booked by them directly;
2% of sales on mail order sales in the territory of the particular salesman.

Despatch and billing expenses amount to 5% sales revenue on all orders.
The sales budger for the coming year indicates the following mix:

Quarter	Total sales Rs.	Direct booking by Salesmen (%)	Mail order sales (%)
1 2 3 4	10,00,000 12,00,000 13,00,000 15,00,000	80 70 75 80	20 30 25 20

Fixed selling expenses for the budget year:

	Rs.
Sales salaries Advertising Traveling expenses	1,00,000 1,50,000 80,000

Sales salaries and traveling expenses are paid uniformly in each quarter. The advertising expenses are incurred as under:
1st quarter -10%; 2nd quarter – 50%’ 3rd quarter -30%; 4th quarter – 10%.
Required:

(i)	Prepare a Quarterly Budget of selling expenses of the year.

(ii)

It has been observed that 50% increase in Budgeted advertising expenditure will double the quarterly quantities of mail order sales. Although it would be at the cost of direct sales, it would also reduce traveling expenditure by 25%. However the rates of commission to salesman would remain unaffected.
Compute the effect of a proposal and suggest whether the same is acceptable.

As a result of a routine analysis of cash flow, the Chief Accountant of X Ltd. considers that there are only three types of cash flow which are likely to vary significantly month to month. These are: Wages/Salaries, Raw materials purchases, Sales Revenue.

Using data colleted over last two years, and taking into account likely changes in the level of operations during the next two months, the following distributions have been estimated for the monthly cash flow in each of these three categories:

Wages/Salaries		Raw Materials		Sales Revenue
Rs.’000	P	Rs.’000	P	Rs.’000	P
10-12 12-14 14-16	0.3 0.5 0.2	6-8 8-10 10-12 12-14	0.2 0.3 0.3 0.2	30-34 34-38 38-42 42-46	0.1 0.3 0.4 0.2

All other cash folws can be regarded as fixed and amount to a net cash out flow of RS.14,000 per month. Currently the company has a cash balance of Rs.50,000.
Required:

(a)

Using the random numbers given below, simulate cash flows for six months. All cash flows are independent and take place at the end of the month. From the simulation results, estimate the probability of the net cash outflow in any month and the cash balance at the end of the six-month period.

Random Numbers
Wages/salaries Raw Materials Sales Revenue	2 4 0	7 4 6	9 1 6	2 0 8	9 3 0	8 4 2

(b)

what is the expected cash balance at the end of six-month period? Why is this value different from the simulation result obtained in (a)?

Please turn over

( 3 )

F-17(MDM)
Revised syllabus

Marks

Delta Ltd. in planning a project to introduce a new product, has listed the following activities:

Activity	Preceding activity	Expected time (weeks)
A B C D E F G H I J	— — A A A C D B,D,E H F,G,I	6 3 5 4 3 3 5 5 2 3

Required:

(a)

Draw the critical path network for the product and determine the critical path and its duration.

(b)

If the start of activity B is delayed by 3 weeks, activity E by 2 weeks and activity G by 2 weeks, how is the total time for the project affected?

(c)

Assume that the times given in the above table are the expected times of the activities, the duration of which are normally distributed with the following standard deviations:

Activity
Standard deviation

A
1

B
0.5

C
1

D
1

E
0.5

F
0.5

G
1

H
1

I
0.5

J
1

Ignore the delays referred in (b) and the possible effect of uncertainty in non critical activities, determine a 95% confidence interval of the expected time on the critical path.

(d)

The costs of the product are estimated to be Rs.1,00,000. if it is completed within 24 weeks, the expected revenues should be aout Rs.10 lakhs, but if the deadline o f24 weeks is not met the product will fail to penetrate the market and a revenue of only Rs.20,000 is expected.
Determine the expected profit on this project. [Ignore the delay referred in (b) and the possible effect of uncertainty in non critical activities]

(a)

Modern Ltd, uses a machine in its production line and intends to replace the existing obsolete machine by a new machine. It wishes to determibe the optimum replacement cycle for the new machine which has the following details:

Age of machine (years)
	0 Rs.	1 Rs.	2 Rs.	3 Rs.
Cost Resale value Running cost	40,000	26,000 8,000	20,000 10,000	16,000 20,000

The asset will never be kept for longer than three years. The replacements will be identical assets. There is no inflation. The company’s cost of capital is 12%.
Ignore taxation:

PVIFA₁, 12%	=	0.893
PVIFA₂, 12%	=	1.690
PVIFA₃, 12%	=	2.402

(b)

The budget for product P is given as follows:

		Rs.
Sales Direct Material Labour Variable overheads Fixed overheads		3,00,000 1,00,000 60,000 40,000 50,000
Profit		50,000

Required:
Test the sensitivity of the n\budget to 10% changes of :

(i)	Material;	(ii)	Labour
(iii)	Variable overhead;	(iv)	Fixed overhead;
(v)	Sales Price;	(vi)	Sales Volume;
Which is the most sensitive variable?

Write short notes on:

(a)	Just-in–time (JIT) Stock management;
(b)	Relevant Cost in Decision Making;
(c)	Back Flush Accounting;
(d)	Life Cycle Costing (LCC)

4x4=16

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